This article is excerpted from chapter 20 “Toward The Establishment of Laissez-Faire Capitalism” from George Reisman’s Capitalism: A Treatise On Economics (1996). See the Amazon.com author’s page for additional titles by Dr. Reisman.
The total abolition of the personal and corporate income taxes and of the inheritance tax is an essential feature of a procapitalist political program. It is required by the individual’s right to his own property. In addition, progress toward the abolition of these taxes helps to create the conditions required for economic progress, by increasing economic incentives and the ability to save, both of which serve to promote capital accumulation and thus a rising productivity of labor and rising real wages.
It must be stressed that the more rapidly economic progress can take place, thanks to reductions in the income and inheritance taxes, the more rapidly can the relative size of the government in the economic system be reduced. The consequence of this is that the degree to which people must experience the burden of the government’s exactions is correspondingly diminished. If economic progress can take place at a rate of, say, 3 percent a year, then even if government activity were not reduced at all, the relative size of the government in the economic system would be cut in half in a single generation. For in that time economic progress at a 3 percent annual rate would have succeeded in doubling the size of the economic system. Thus, the burden experienced even from supporting a government of the same size would be felt much more lightly.
These facts imply two important principles pertaining to our political program. First, in reducing income tax rates, our primary emphasis should usually be on reducing the maximum rates, until there exists only a single proportional income tax rate. Reductions in the upper brackets have the greatest impact in strengthening economic incentives and saving, and thus do the most to bring about economic progress. We need to make the public aware of how everyone benefits from these tax reductions–of how they operate to raise the demand for labor and thus wages, and, at the same time, progressively to increase the productivity of labor and thus the supply of goods relative to the supply of labor, which steadily reduces prices relative to wages and thereby steadily raises real wages. Of course, once the so-called progressive aspects of the income and inheritance taxes have been eliminated, work should immediately commence on the steady reduction in what remains of those taxes, and should continue until they are totally eliminated.
Second, a closely related minimal short-run political demand we should make is that the level of real per capita government spending be immediately frozen, so that it does not exceed its current level. Such a demand would be a call not for the immediate abolition of the welfare state and improper government activity of all kinds, but a demand for an immediate cessation in their further growth. Its implementation would result in a continuing automatic shrinkage in the relative size of the government, so long as economic progress continued.
A possible way to start on the elimination of the income/inheritance tax right now would be to fight for the immediate adoption of a universal exemption of at least 51 percent of everyone’s income from federal, state, and local income taxation under all circumstances. This would be in the name of the principle that the individual is the owner of his own income. The 51 percent exemption would constitute meaningful recognition of this principle. Over the years, we would work to increase the tax exempt portion of everyone’s income while reducing the rates on the taxable portion, until the income tax was totally abolished. Given the drastic reductions in welfare-type spending I have proposed and the achievement of economic progress, it should be possible to phase out the income tax entirely over the course of a generation.
The same phase-out procedure should be applied to the corporate income tax. In addition, in the short-run, we should demand the elimination of the double taxation presently entailed in the corporate income tax. It represents double taxation for a corporation first to be taxed on its income, and then for the stockholders of that corporation to be taxed again on what they receive from their own corporation, which has already paid a substantial income tax. The principle of the 51 percent exemption and its progressive enlargement should be applied to the total of every individual’s personal income plus his share of the profits of any corporation in which he owns stock.
However, the most important short-run goal that we should emphasize in connection with taxes is compelling the government to respect the ordinary civil rights of taxpayers. We should demand the abolition of criminal penalties for income-tax evasion, in the name of the principle that an individual cannot steal or fraudulently keep what is his own property to begin with. Also, just as in the case of government agencies seeking search warrants, we should demand that the Internal Revenue Service be compelled to obtain a prior court order authorizing any seizure of property or attachment of salaries and bank accounts it wishes to undertake. If it is not possible to obtain such elementary protection of individual rights, then a compromise that at least would be a move in the right direction would be the existence of automatic judicial review of all such IRS activities. And until criminal penalties for not paying taxes are eliminated, we should demand that the Fifth Amendment rights of individuals to remain silent in order not to incriminate themselves be applied to taxpayers, i.e., that no criminal penalties exist for failure to file an income tax return. In other words, we should demand that taxpayers, who are presently subject to criminal law, enjoy the full civil rights accorded to criminals. In answer to objections that the income tax cannot work without the violation of elementary civil rights, we should reply that if that is the case, then it is further proof of why the income tax must be abolished. So long as the supporters of the income tax wish to retain it, we must demand that they accept the burden of finding ways of harmonizing it with respect for such rights.
A further principle that I believe should be applied in connection with proposals for the reform of the income tax is that no reductions of any kind should ever be made in existing tax exemptions, shelters, or so-called loopholes. Our principle should be that no one’s income taxes should ever be increased over what they would be under existing law. It is true that the various exemptions, such as for interest paid on home mortgages, have some economically distorting effects by artificially encouraging some types of economic activity at the expense of other types, but those distortions will become less and less significant with the reduction in the burden of the income tax, and will disappear altogether when it disappears. We should take the position that every reform of the income tax must serve to reduce the income taxes paid by some or all people, and not increase the income taxes paid by anyone.
Still a further principle that we must uphold concerning tax reform, and one whose necessity should be obvious on the basis of all the preceding discussions concerning the role of capital formation and the consequences of inflation, is that tax reductions must be accompanied by equivalent or even more than equivalent reductions in government spending–specifically, in nondefense spending primarily. In view of the highly destructive effects of budget deficits, it should be clear why tax cuts must be accompanied at least by equivalent reductions in government spending of one kind or another. Deficits, it should be recalled, deprive the economic system of the benefit of the portion of the supply of savings that must be used to finance the deficits. In the absence of a gold standard, they also lead to the rapid inflation of the money supply, which, of course, also undermines capital formation. Cutting taxes without cutting government spending, therefore, is no solution for reducing the government’s assaults on the economic system.
The reason the reductions in government spending must be primarily at the expense specifically of nondefense spending is that defense is one of the few legitimate functions of government. Spending for defense should be cut only as it becomes genuinely safe to do so. It should be blatantly obvious that we should never advocate imperiling the defense of this country, which means, essentially, the defense of such freedom as exists in the world, in order to preserve any aspect of the welfare state. Indeed, our need for national defense exists for no other reason than to prevent the imposition of the underlying premise of the welfare state in a more extreme and more consistent form by outside military force. That premise, of course, is that some men have the right to enslave others for the satisfaction of their needs. Thus, not only must we never dream of sacrificing national defense to any aspect of the welfare state, but what we want national defense for is precisely to protect us from the logically consistent version of the welfare state that is represented by totalitarian socialism. Furthermore, what we should advocate in connection with national defense is overwhelming military superiority for the United States. That is our only real guarantee of avoiding war. If we have such superiority, we will not start a war, and it is unlikely that anyone else will dare to do so.
Copyright 1996 George Reisman. All rights reserved. The encyclopedic Capitalism: A Treatise on Economics is a required reference for every Capitalist’s library. Reisman’s treatise is now available in two volumes: Volume I (focuses on microeconomic issues) and Volume II (focuses on macroeconomic issues).
Articles in this Series
- Toward the Establishment of Laissez-Faire Capitalism (Part 1 of 10)
- Privatization of Property: Importance of Fighting on Basis of Principles (Part 2 of 10)
- The Freedom of Production and Trade Under Capitalism (Part 3 of 10)
- Capitalism and the Abolition of the Welfare State (Part 4 of 10)
- Abolition of Income and Inheritance Taxes Under Capitalism (Part 5 of 10)
- Establishment of Gold as Money (Part 6 of 10)
- A Pro-Capitalist Foreign Policy (Part 7 of 10)
- Separation of State from Education, Science, and Religion (Part 8 of 10)
- A General Campaign at the Local Level for Laissez-Faire Capitalism (Part 9 of 10)
- The Outlook for the Future of Capitalism (Part 10 of 10)